Those that don’t learn from history….

The Foxconn story continues to reverberate. I have been collecting articles and opinions on the topic with the intention of writing a longer piece, but now seems the time to comment. This week, Foxconn said that it would move away from the ‘factory town’ concept and delegate back to government the issues of housing and other ‘social functions’. The firm said that it might sell the dormitories back to the government. The Financial Times quotes founder and chairman Terry Gou as saying, “If a worker in Taiwan commits suicide because of emotional problems, his employer won’t be held responsible, but we are taken to task in China because they are living and sleeping in our dormitories”, and this, apparently, has become ‘too big a burden for Foxconn to bear’. It’s not clear from the quote whether the burden he is talking about is the emotional health of its staff or the ‘unfairness’ that Foxconn gets the blame.

At the same time, Foxconn has asked its customers to help by paying more for its products so that it can raise the wages of its staff.

There are a couple of things wrong with this picture.

One is that Foxconn, according to companies that have we have spoken to, has a reputation for extremely sharp cost-cutting. One company told me that “they simply ask what your BOM cost is [component material costs] and then build the thing for you at that price”. The belief has been that Foxconn’s huge purchasing power and vertical integration allows it to save a lot of money on components such as connectors and cables that can cost a lot, which offset its assembly cost. Simply saying, “We need to charge you more so that our staff can be better paid” is unlikely to get a lot of sympathy from the buying departments at the major consumer electronics companies in anything except the very short term. I can almost hear the sound of Foxconn’s competitors rubbing their hands in glee!

Foxconn also has a very positive reputation for ‘execution’, that is to say, we’ve rarely heard from customers of the company that there have been problems of quality or delivery times. The intensity of pressure needed to simultaneously meet these needs of lowest cost and best performance at all levels of the company, are both the reasons for the problems at the company, but also, of course, the reasons for the firm’s success. As the english expression has it: “Those that live by the sword, die by the sword” or to put it another way (and to quote one of my favourite guitarists and singers, Ry Cooder), “The very things that make you rich will make you poor”.

On a second note, once again I am reminded of my days in the steel industry back in the 1970s (I’ve talked before of the similar mentality of steel plant and LCD factory bosses). I worked for a steel company that owned a huge factory in Corby in the rural centre of England. The factory totally dominated the town, as was the case in many of the older steel and mining communities. The energy price rises of the 1970s made the low grade ore that could be mined locally uncompetitive and the site was a long way from the deep water ports used to bring in high grade ore from around the world, so it had to close. The effect was devastating on the local culture, and unemployment in the 1980s reached over 30%. It took around 11 or 12 years and a lot of government and EU money for unemployment to get back to the national average.

More recently, Meko is based not far from Basingstoke, once dominated by IBM. However, IBM, at Greenock in Scotland and elsewhere around the world, discovered the problems that are caused if a single site becomes too big an employer in an area. It might seem to be a great idea when things are going well as the local social and political environment (planning regulations, transport, etc. etc.) are so much influenced by the company’s needs. However, when things go wrong, it can be devastating, with spirals of negative impact. So I remember hearing more than 20 years ago that the company made a policy of not expanding a single location beyond a certain percentage of local employment.

(And, on reflection, the kinds of problems that Foxconn is having are probably the reasons why the trend for ‘company villages’ from the late 19th century, like ‘Port Sunlight‘ (Lever Bros) in Cheshire, Stewartby (London Brick) in Bedfordshire or Silver End in Essex (Crittall Windows – and where my wife and I had our first house) did not survive.

It seems, once again, that those that don’t learn from history are condemned to repeat it.